THE RECENT US ELECTION has cast doubt over the future of the Trans-Pacific Partnership (TPP) and whether it will be ratified by the US Congress (for a discussion about the TPP in the context of legal services, see China Business Law Journal volume 7 issue 5: Legal Services and FTAs.)
If the TPP is jettisoned by the US, certain countries in the Asia-Pacific region will pin greater hopes on another proposed mega-regional trade agreement, the Regional Comprehensive Economic Partnership (RCEP). The RCEP is currently being negotiated between the 10 member states of the Association of Southeast Asian Nations (ASEAN) and the six states with which ASEAN has existing free trade agreements: Australia, China, India, Japan, South Korea and New Zealand. Both the TPP and the RCEP are considered to have profound geopolitical implications in addition to having significant potential to promote trade liberalisation in Asia. This article considers some key differences between the two proposed agreements, various ways in which the countries in the Asia-Pacific region can maintain the momentum towards freer and fairer trade and what obstacles remain in terms of achieving the objectives of these agreements. The issues are considered with specific reference to financial services and legal services.
TPP AND RCEP: KEY DIFFERENCES
In the area of financial services, the role of regional trade agreements such as the TPP and the RCEP needs to be viewed in the context of calls for greater regional financial integration. Financial integration complements trade integration, a point that has been recognised by many countries within the Asia-Pacific region. The importance of financial integration is reflected in ASEAN’s Financial Integration Framework, the objectives of which include removing restrictions on the provision of financial services by ASEAN financial institutions and increasing the integration of the regional capital markets.
Encouragingly, we have already begun to see cautious moves towards financial integration between certain ASEAN members in the area of banking, insurance and capital markets. One noteworthy development in this regard is the ASEAN Collective Investment Scheme Framework, which was launched in 2014 by Singapore, Thailand and Malaysia and provides a framework for the mutual recognition of investment funds. This is particularly interesting given the parallel establishment of a similar arrangement between mainland China and Hong Kong, which commenced in 2015, and also the plans to establish the Asia Region Funds Passport between Australia, Japan, South Korea, New Zealand and Thailand. Although these three initiatives are complementary in nature and have the potential – at least in theory – to be rolled into one framework at some point in the future, they nonetheless reveal the different geopolitical alignments within the Asia-Pacific region.
It must be noted that achieving financial integration is not an easy task in view of the significant differences between markets in terms of their legal and regulatory systems. These differences make it difficult to achieve convergence in rule-making and best practice and are particularly stark in areas such as disclosure requirements, licensing requirements and consumer protection laws.
The challenges are compounded by the differences between regional financial markets in terms of their respective stages of development and also their varying levels of sophistication. They are also compounded by domestic concerns, including the need to maintain financial stability and the ever-present shadow of local protectionism.
The TPP has a greater focus on financial services and legal services than the RCEP. In fact, the TPP serves more as a WTO-plus, comprehensive trade agreement with rigorous and standardised requirements, whereas the RCEP serves more as an agreement to multilateralise and consolidate the existing bilateral trade agreements within the region. The RCEP is also underpinned by the need for flexibility and differential treatment in order to accommodate the different levels of development between the member countries, which is likely to limit the degree of liberalisation that the RCEP can achieve. Indeed, the leaked draft chapter on trade in services in the RCEP contains a provision to the effect that the parties recognise the importance of increasing the participation of the least-developed ASEAN member states in regional services trade and that the commitments by such states may be made in accordance with their individual stage of development.
In the area of financial services, there are two aspects that are particularly noteworthy in the TPP. First, the TPP recognises and facilitates the supply of certain financial services on a cross-border basis instead of requiring suppliers of those services to establish a presence in other member states. Secondly, the TPP recognises and facilitates the mobility of financial institution professionals between member states. Similar liberalisation applies to legal services, where the TPP recognises and facilitates the provision of legal services on a cross-border basis and also encourages greater integration between foreign and domestic lawyers.
These two trends – an increase in the cross-border supply of services and an increase in the mobility of professionals – are particularly important within the Asia-Pacific region as its financial and legal services markets become more sophisticated and integrated. In the area of financial services, these trends are accelerated by developments in Fintech, which is transcending borders and innovating and disrupting financial services in a way that is fast outstripping the ability of regulators in the region to keep up. In the area of legal services, these trends are accelerated by the strengthening of regional networks between legal service firms and the increase in offshore investment by companies from capital-exporting countries such as China.
[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1″ ihc_mb_template=”2″ ]
MAINTAINING THE MOMENTUM
Given the challenges outlined above, particularly the divergence between markets in terms of their legal and regulatory systems and also their different stages of development, efforts should be strengthened in two areas in particular. The first area is capacity-building, particularly on the regulatory front. Fintech is a good example of the need for capacity-building as regulators struggle to achieve an appropriate balance between, on the one hand, encouraging innovation and, on the other, having an appropriate regulatory system in place to satisfy the twin priorities of financial stability and consumer protection. The second area is convergence and harmonisation in terms of standard-setting and best practice. In order to achieve the objectives of the RCEP, each of these areas will require active cooperation and information-sharing between the member states.
OBSTACLES TO MEGA-REGIONAL TRADE AGREEMENTS
All of this leads to the third question – namely; what are the obstacles to the successful implementation of mega-regional trade agreements?
Two obstacles are particularly relevant. The first is a lack of global and regional consensus concerning how issues should be framed and resolved. This often arises out of fundamental differences between markets in terms of how concepts and problems should be defined. And it is very difficult to achieve convergence in regulatory approaches if there are fundamental differences about the nature of the underlying problems, how they should be framed and how they should be resolved. There are many differences that can be identified in the area of financial regulation and financial services. Some of these differences arise out of the response to questions such as the following: what is ‘shadow banking’? What is a ‘systemically important financial institution’? What is an ‘investment fund’? What is a ‘financial service’ and what is a ‘financial product’?
The second obstacle is a lack of consensus at the domestic level as to the nature and pace of liberalisation and, more fundamentally perhaps, the advantages and disadvantages of liberalisation. In the area of legal services, for example, there is a lack of consensus in many jurisdictions in the Asian region as to the role of local lawyers in society, the scope of the services that lawyers provide and how lawyers should be regulated. When the issues are viewed against this backdrop, it should come as no surprise that many markets struggle to agree on the pace at which the legal services market should be liberalised and how the provision of legal services by foreign lawyers should be regulated (for a discussion about the benefits of allowing greater integration between Chinese law firms and foreign law firms, see China Business Law Journal volume 4 issue 7: Liberalisation and integration of legal services). In other words, it is not just a question of local protectionism, but it is also a question about how fundamental issues should be framed and resolved.
In short, although it is relatively easy to agree on outcomes, we all have different terminology for defining the problems that need to be resolved and the solutions that are required to achieve those outcomes. Not only are we dealing with what has been described as a ‘noodle bowl’ of different approaches – including bilateral, plurilateral and multilateral approaches – we are also dealing with different types of noodles within the noodle bowl or, to put it differently, an alphabet soup of differences in terms of the ways in which fundamental issues are framed and resolved.
It should be acknowledged that there are encouraging signs of progress. The trend towards passporting arrangements as reflected in the proposed Asia Region Funds Passport is significant in terms of encouraging countries to subscribe to a common set of rules and has the potential to serve as a model for convergence and harmonisation in other areas. However, convergence and harmonisation can only occur when there is consensus as to how issues should be framed and resolved and this is why greater focus needs to be placed on capacity-building and on achieving a common understanding of the problems and challenges.
It is also important to adopt a bottom-up approach, which takes these local differences into account and builds consensus from the bottom up, in addition to a top-down approach, which establishes general principles and outcomes and expects them to filter down to the operational level.
For this purpose, it is important to enlist the services of, and strengthen links and dialogue between, industry associations and research institutions in addition to maintaining the links and dialogue between policy-makers and governments. In other words, a combined effort is required on the part of government, industry and researchers. An example in this regard – and this is just one example – is the Asia-Pacific Financial Forum, which is an APEC initiative that encourages private-public dialogue in order to promote regional financial market development and integration in the Asia-Pacific.
WHERE TO FROM HERE?
In view of developments in the US and the possible abandonment of the TPP, it is likely that regional – and global – ambitions concerning trade liberalisation will need to be modified. The RCEP promises to play an important role in promoting free trade in the region and plugging any gap left by the abandonment of the TPP. However, it is important to be aware of the limitations to this proposed trade agreement and the realities in Asia. These realities include the traditional preference for bilateral relationships and for a consensus-driven, “soft-law” approach – such as that favoured by the ASEAN member states – where the outcomes are more high-level and general in nature.That said, if the countries in the region can redouble their efforts in the area of capacity-building and convergence in terms of standard-setting and best practice, we can afford to be optimistic about the future benefits of the RCEP in areas such as financial services and legal services.
[/ihc-hide-content]
This article is an abridged text of a paper that the author delivered at the 9th ASEAN-Australia-New Zealand Dialogue, which was held in Kuala Lumpur from 30 October to 1 November.
Andrew Godwin
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.
